Apr 03, 2017
From KPMG TaxWatch
Recently, the Iowa Supreme Court held that a parent corporation lacked the requisite nexus to be included in a consolidated return with two of its subsidiaries. The subsidiaries were LLCs that had elected to be treated as corporations for federal—and Iowa—tax purposes. The parent corporation received income (distributed earnings) from the subsidiaries whose business activities occurred, at least in part, in Iowa. The parent also received payments from the subsidiaries under a tax allocation agreement, which were equal to the subsidiaries’ allocated share of the group’s overall tax liability. For the tax year at issue, the parent and two subsidiaries filed a consolidated Iowa return reporting losses. On audit, the Department of Revenue determined that the parent could not be included in the consolidated return because it did not derive any taxable income from within Iowa for the tax year. Excluding the parent resulted in a substantially greater tax liability and the taxpayer subsequently protested the Department’s assessment. After a trial court ruled in favor of the Department, the taxpayer appealed.
Under Iowa law, a corporation can join in the filing of a consolidated return if it has nexus with Iowa and taxable net income. A corporation that is exempt from tax cannot be part of the consolidated return. Iowa law provides an exemption from corporate income tax for a corporation whose activities are limited to “[o]wning and controlling a subsidiary corporation” and that lacks a physical presence in Iowa related to its ownership or control. The parties agreed that the parent lacked a physical presence related to its ownership and control. Thus, the disputed issue was whether the parent’s activities constituted “owning and controlling a subsidiary corporation.” The parent argued that it did more than simply owning or controlling a subsidiary corporation in that it provided, through a third-party, significant managerial, administrative, strategic planning, and financial support to its subsidiaries. The Iowa Supreme Court disagreed. Without addressing whether hiring a third-party to provide these services was in fact an “activity,” the court determined that all of the parent’s activities were routine features of a parent corporation’s ownership and control of its subsidiary entities. The court also rejected the parent’s argument that it provided working capital to the subsidiaries under the tax allocation agreement. In short, because the tax obligations accrued daily but were paid on a quarterly basis, the parent argued it was providing working capital to the entities, which was an activity distinct from the routine functions of ownership and control. The court again disagreed. In its view, the parent’s decision to only require quarterly payments was consistent its ownership and control of the entities. Finally, the court rejected the parent’s additional argument that it had nexus because it owned intangible property—stock and money—that had a taxable situs in Iowa. Assuming without deciding that the ownership interests in the LLCs were “shares of stock,” the court held that the exemption at issue contemplated that a parent would hold some evidence of its ownership interest in its subsidiaries. The “money” argument was also rejected, as the tax allocation payments did not transform into the parent’s assets due to the temporal lag in payment. The court concluded that the parent did not have Iowa nexus and could not be included in the consolidated return. Please contact Jodie Scott at 612-305-5210 with questions on Myria Holdings, Inc. v. Iowa Dep’t of Revenue.
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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.